McCormick & Company, Inc. (MKC) reported its quarterly financial results for the period ended August 31, 2024. The company’s net sales increased by 4.5% to $1.35 billion, driven by growth in its consumer and industrial segments. Gross profit margin expanded by 130 basis points to 34.4%, while operating income rose by 10.5% to $243.8 million. Net income increased by 12.1% to $173.9 million, resulting in diluted earnings per share of $0.93. As of August 31, 2024, the company had 16,165,577 shares of common stock and 252,191,469 shares of common stock non-voting outstanding. The company’s cash and cash equivalents stood at $343.8 million, and its long-term debt was $1.45 billion.
Business Profile
McCormick is a global leader in flavor, manufacturing, marketing, and distributing spices, seasoning mixes, condiments, and other flavorful products to retailers, food manufacturers, and the foodservice business. In fiscal year 2023, approximately 39% of their sales were outside the U.S. McCormick manages its business in two segments: consumer and flavor solutions.
Executive Summary
In the third quarter of 2024, McCormick’s sales declined by 0.3% from the prior year, driven by unfavorable pricing actions, divestitures, and foreign exchange impacts, partially offset by favorable volume and product mix. Operating income increased 16.9% due to gross margin expansion and lower selling, general, and administrative expenses. Excluding special charges, adjusted operating income increased 14.9%.
Diluted earnings per share was $0.83 in Q3 2024, up from $0.63 in Q3 2023, driven by higher operating income, lower special charges, a lower effective tax rate, and increased income from unconsolidated operations. Excluding special charges, adjusted diluted EPS was $0.83, up 27.7% from $0.65 in the prior year.
For the full year 2024, McCormick expects net sales to range from a 1% decline to a 1% increase, with a minimal impact from currency. Gross profit margin is expected to increase 50-100 basis points, and operating income is projected to increase 9-11%, including a minimal currency impact. Adjusted operating income is expected to increase 4-6%. Diluted EPS is projected at $2.81 to $2.86, or $2.85 to $2.90 on an adjusted basis, up 5-7% from 2023.
Results of Operations - Company
In Q3 2024, sales declined 0.3%, including a 0.6% favorable impact from volume and product mix, offset by a 0.2% unfavorable impact from pricing actions and a 0.3% decline from divestitures. Foreign exchange negatively impacted sales by 0.4%. For the first nine months of 2024, sales increased 0.3%, with a 0.8% favorable impact from pricing and a 0.4% unfavorable impact from volume and product mix.
Gross profit increased 4.4% in Q3 2024 and 3.8% in the first nine months, driven by favorable product and customer mix, cost savings, and pricing actions, partially offset by increased commodity and conversion costs. Gross profit margin improved 170 basis points to 38.7% in Q3 2024 and 120 basis points to 37.9% year-to-date.
SG&A expenses decreased 2.7% in Q3 2024 due to lower performance-based compensation and CCI-led cost savings, but increased 1.7% year-to-date due to higher advertising, promotional, and R&D spending, partially offset by lower compensation expenses and CCI savings.
Special charges were $1.9 million in Q3 2024 and $7.9 million year-to-date, primarily related to the company’s Global Operating Effectiveness (GOE) program and the transition of a manufacturing facility.
Interest expense increased slightly, while other income increased due to higher interest income and lower foreign currency exchange losses.
The effective tax rate was 16.7% in Q3 2024, down from 21.4% in the prior year, due to $16.3 million of net discrete tax benefits. The adjusted effective tax rate was 16.8% in Q3 2024 and 18.5% year-to-date.
Income from unconsolidated operations, primarily the McCormick de Mexico joint venture, increased $4.5 million in Q3 2024 and $18.3 million year-to-date.
Results of Operations - Segments
Consumer Segment:
Flavor Solutions Segment:
Market Risk Sensitivity
McCormick is exposed to foreign currency, interest rate, and commodity risks, which it manages through the use of derivative financial instruments. The company does not enter into contracts for trading purposes.
As of August 31, 2024, McCormick had $1.11 billion in notional value of forward foreign currency contracts and $983.8 million in notional value of cross-currency swaps, with net unrealized losses of $14.3 million and gains of $12.7 million, respectively.
The company also had $600 million in notional value of interest rate swaps, with net unrealized losses of $36.0 million. McCormick does not use derivatives to manage commodity price volatility.
Liquidity and Financial Condition
McCormick’s primary sources of liquidity are cash flows from operations, existing credit facilities, commercial paper, and access to capital markets. Net cash provided by operating activities was $463.2 million in the first nine months of 2024, down from $660.1 million in the prior year period, due to higher working capital needs, timing of incentive compensation payments, and income tax payments.
Investing activities used $189.1 million in the first nine months of 2024, up from $184.8 million in the prior year, primarily due to higher capital expenditures. Financing activities used $205.9 million, down from $701.2 million in the prior year, as the company had a net increase in short-term borrowings compared to a net decrease in the prior year.
As of August 31, 2024, McCormick had $609.0 million of cash from non-U.S. subsidiaries temporarily used to pay down short-term debt in the U.S. The company has $500 million in a 364-day revolving credit facility and a $1.5 billion five-year revolving credit facility to support its operations and commercial paper program.
McCormick expects its cash flows, credit facilities, and access to capital markets to provide sufficient liquidity to meet its debt obligations, working capital needs, capital expenditures, dividends, and other cash requirements for the next 12 months.
Outlook and Analysis
McCormick’s financial performance in 2024 is expected to show modest growth, with net sales ranging from a 1% decline to a 1% increase and adjusted operating income increasing 4-6%. The company is navigating a challenging inflationary environment by implementing pricing actions, managing its product mix, and driving cost savings through its continuous improvement programs.
The consumer segment faces headwinds from pricing actions and the impact of divestitures, but is benefiting from favorable volume and product mix. The flavor solutions segment is seeing stronger performance, with pricing actions and cost savings offsetting volume and mix challenges.
Overall, McCormick appears to be managing the current operating environment effectively, with a focus on maintaining profitability through pricing, productivity improvements, and portfolio optimization. The company’s strong cash flow and liquidity position provide flexibility to invest in growth initiatives and return capital to shareholders.
However, risks remain, including ongoing supply chain and inflationary pressures, potential foreign exchange volatility, and the impact of macroeconomic conditions on consumer demand. McCormick’s ability to navigate these challenges while continuing to innovate and expand its global footprint will be key to its long-term success.